In a final rule issued on March 30, CMS clarified uncompensated care costs for Medicaid patients are limited by what a hospital received from other sources, such as commercial insurers, Medicare or the patients themselves.

This interpretation of the rules surrounding Medicaid disproportionate share hospital (DSH) payments had already existed, but the new regulation makes it explicit.

The new rule only slightly modifies the text of the regulation to spell out that for purposes of calculating hospital-specific DSH limits, “costs” means the costs net of third-party payments received.

“For example, if a hospital treats two Medicaid eligible patients at a cost of $2,000 and receives a $500 payment from a third party for each individual and a $100 payment from Medicaid for each individual, the total uncompensated care cost to the hospital is $800, regardless of whether the payments received for one patient exceeded the cost of providing the service to that individual,” the rule said.

CMS said this had been a source of confusion prior to a 2008 DSH rule, with some hospitals and states excluding uncompensated care costs and payments related to Medicaid-eligible patients who had some sort of third-party coverage. Other facilities excluded only the payments, leading to “an artificial inflation of uncompensated care costs and, correspondingly, of hospital-specific DSH limits.” This allowed some hospitals to be paid twice for the same costs—once by Medicaid and again by a third-party payer or Medicare.

Many commenters on the proposed rule claimed the new language violated the existing laws on DSH payments. CMS argued the change betters support the intent of the original statute, ensuring Medicaid DSH payments don’t go to services which have already been compensated.